Arm's Length Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Arm's Length, written in plain English, along with examples of how it is used.
What is Arm's Length?
n. a person who is authorized to act on someone else’s behalf in a legal or business matter is called attorney in fact, who then acts in the principal’s name. say for example, signing the principal’s name to documents and filing suit with the principal’s name as plaintiff. Since he is required to be completely honest, fair and loyal to the principal hence attorney-client priviledge holds for his contract with his client. But the power of attorney is intended to be produced before court.
History and Meaning of Arm’s Length
The term "arm's length" originated in the medieval English real estate stage, during which buyers and sellers sat opposite each other holding a stick that represented the property, hence the term "arm's length."
In current legal terminology, an "arm's length" transaction refers to a transaction between two parties that are unrelated and have no relationship between them, as if they were strangers. This puts both parties in a balanced position of bargaining power, leading to fair prices and business practices.
Examples of Arm's Length
A company purchases equipment from an unrelated vendor at arm's length primarily through negotiating for the best price possible, leading to fair pricing.
In divorce proceedings, a property is subdivided through arm's length negotiation by the parties, which leads to a fairer and non-biased distribution of assets.
In a merger, an arm’s length negotiation between the two firms is important to ensure fair pricing of company shares.
Legal Terms Similar to Arm's Length
Due Diligence - ensuring that there are no hidden interests of either party that may make the transaction a conflict of interest.
Fairness Opinion - an independent valuation of assets in transactions to ensure fair pricing.
Privity of Contract - Principle by which only parties to a contract have the power to enforce or fulfill its requirements.